Flexible manufacturing plants resulted in a rather high supply-side substitutability between different cereals. This implies that RET cereal producers operate in a broader cereal industry as opposed to one for only a specific type, such as puffed or shredded wheat cereals. However, differences exist between supply-side substitutability of well-established ranged cereals, such as Kellogg and private labels.
Specifically, as private labels focus on fewer variations of cereals that are simpler and cheaper to produce, It Is likely that that their supply-side substitutability will be lower than that of branded cereal producers. Additionally, as cereal producers started to Include granola bars and other types of RET snack food (Case A, 19971 we assume that producers now compete in a broader RET cereal product industry than previously. From the demand-side perspective, we distinguish between the substitutability of animal products made by different brands and the substitutability between different cereal types.
Cereal consumers tend to be fickle when it comes to brand substitution, depending on current trade promotions offered by a particular producer (Case A, 1997). As such, the massive coupons use that occurred in the years preceding 1994 strengthened the demand-side substitutability in the industry. Consumers’ propensity to switch between different cereal types largely depends on personal preferences. However, substitution remains high within subcategories (e. G. Healthy cereals, granola,etc). Manufactures thus compete not only In the RET Industry as a whole but also within particular product cereal categories.
Also since associated costs were more in the case of private brands, it affected retailer’s profitability. Moreover, the ROTC breakfast cereal industry was recognized as one of the most advertised industry, reaching an advertising/sales ratio of 18. 5% in sass. Heavily investing in issues of coupons and trade promotions: e. G. : Bog’s that sustained an increase in cereal prices as high as 15. % from 1990 to 1993. The industry was also characterized by high R investment to improve existing products and constantly introduce new one’s. As well as large purchasing power and high price-cost margins for the Big Three that dominated the industry.
General Mills dropped its promotional spending significantly while Phillip Morris’ and other smaller competitors made sharp rise in spending to take market share from Kellogg and General Mills. There are several competitive game plans that a market leader can initiate to stop this lateral undermining action from competitors. Market leaders have he most to lose through competition and therefore play defensive strategies the potential outcomes of the decision paths.
Game Theory teaches us that, in perfect competition, when General Mills reduced spending, Kellogg should have maintained spending or even increased spending to take market share because the likely reaction from competitors would be to do the same. However Since the RET industry has been historically notorious for being uncompetitive it is hardly a surprise that Kellogg reduced spending as well. Game Theory has its limitations because it can’t equate brand loyalty and Kellogg is likely only to loose the very price sensitive consumers.
Several strategies exist for Kellogg after the dissentions among the Big Three in promotional spending. Such as popular character based in-pack premiums in its popular brands (further breaking with the Big Three), acquisition of a private label to try and catch extremely price sensitive consumers or focusing on expanding market share in mega retailers. Kellogg is unable to compete on a price level basis with private labels and the difference in quality is becoming much smaller, especially with Malt-O-Meal’s state of the art facility.
The RET cereal industry growth has slowed and Kellogg hasn’t introduced a new major hit brand in more than a decade. In terms of product life cycle, Kellogg cereal has reached maturity and strategy teaches us that competitive advantage is temporary and the need to achieve new growth through re-creation and new product life cycles. Our recommendation for Kellogg is to further diversify and expand into a new but similar industry. The snacks industry offers a great opportunity for Kellogg to diversify its sales and increase growth. The snacks-RET industry is very new and very ewe competitors exist in the market in 1994.
